Unpacking the CSR-CFP Link

The continuing financial crisis calls for different managerial paradigms and a broader definition of business success. The narrow and exclusive focus on short-term monetary results has led to counter-productive and negative consequences for business and society. All over the world, different approaches are emerging. Thanks to innovative corporate social responsibility (CSR) practices, a great number of firms have been working with stakeholders in order to support broad and shared value-creation processes that are able to benefit the different constituencies, including not only shareholders but also employees, customers, suppliers, the community in which the company operates, and others.

The real impact of CSR efforts on corporate performance is still questionable. In fact, for four decades, research on the role and responsibilities of business has centered on the business case for CSR. As a result, an increasing number of studies have appeared on the ties between corporate social performance (CSP) and corporate financial performance (CFP). Yet, the business case for social responsibility and the related link between CSP and CFP remain the most controversial areas in studies on business-in-society.

As a consequence – and in order to keep research aligned with business practice and growing practitioner interest in CSR – the shift away from a simplistic assumption over the link between CSP and CFP has become increasingly stringent, along with a growing request to reorient empirical investigation toward a deeper understanding of what it means to succeed in CSR, disentangling its specific dimensions.

Based on an extensive review of the literature on the CSP-CFP link, our work aims at providing a comprehensive organizing framework for systematizing the performance effects of specific CSR-related efforts. In particular, adopting a stakeholder-based view of a firm’s engagement in CSR, we delve into the various dimensions underlying the relationship between stakeholder-related CSR policies and specific performance outcomes. In so doing, we point out the drivers of the relationship, thus advancing the existing debate over the need for a contingency approach to the business case for CSR.

In more detail, our contribution provides a guide that is useful for understanding better the mechanisms by which certain activities may translate into improvements in a firm’s performance, leveraging on specific drivers of market and operational results. Thus, it moves beyond a straightforward view of the CSP-CFP link, underlining the limits of paying disproportionate attention to “black box” approaches to both CSR and the performance of firms.

Rooted in the stakeholder theory of the firms, recent research has been appreciating the impact of CSR, both at different levels of analysis and in specific management domains and stakeholder interactions. In this context, research has started to focus on organizational, market, consumer-based, and/or environmental outcomes of specific areas of responsibility. Moreover, emerging theoretical and empirical accounts have started to investigate the impact of specific tools and practices of CSR management in a stakeholder setting, based on a conception of CSR as a new governance model rooted in the value of stakeholder relationships and in the capacity of a firm to meet stakeholder needs beyond mere legal compliance. Thus, a clear understanding of CSR performance consequences should disentangle different management areas and investigate how specific activities translate into organizational, managerial, or market gains according to a multiple-bottom-line perspective.

An extensive and in-depth review of 250 empirical and theoretical contributions allowed us to map the major mechanisms by which CSR efforts may turn into performance outcomes, leveraging on stakeholder-related performance drivers. Accordingly, Figure 1 provides a summary picture of how integrating CSR in specific management domains (e.g., supply chain, internal organization) can lead to both revenue-related and cost-related outcomes through its impact on performance drivers such as, for example, perceived trustworthiness and company reputation, organizational commitment, consumer-company identification, and a firm’s innovativeness.

By unpacking the CSP-CFP link, our framework provides an important further step for both research and managerial understanding of the need for setting clear boundaries and specifying levels of analysis while addressing the business case for CSR.

For academia, this contribution may open new research directions. First, disentangling specific dimensions of the CSP-CFP link offers insights into the factors driving variability in performance. The business case for CSR is more complex than posited by studies testing direct effects between aggregate measures of CSR and financial performance. Recognizing this complexity translates into a clearer understanding of the outcomes associated with CSR initiatives, while accounting for the effect of mediating variables and contingencies. In this regard, the studies on the performance outcomes associated with specific CSR efforts converge on pointing out intangibles as the key explanation for differential performance. In fact, CSR supports firms in the process of accumulating intangible assets’ accumulation as well as, strengthensing a company’s ability to identify, protect, and give value to key resources, such as skills and competences;, knowledge and innovation;, values;, legitimacy;, trust; and reputation in the stakeholder network. Giving emphasis to intangible resources as the main drivers of a firm’s ability to benefit from CSR, our study offers opens up to interesting perspectives on both the search for new processes of intangible accumulation and the dispersion of results in the studies on the performance consequences of CSR. On the one side, our study proposes a taxonomy of management domains in which to investigate intangible accumulation and the search for new sources of competitive advantage. On the other side, we show the need for analyzing successful CSR strategies that targeting specific intangible resources as a mediating variable.

Moreover, although tendencies toward disentangling CSR-related performance mechanisms are starting to emerge from the literature, attention is still disproportionally addressed toward the impact of CSR efforts on the firm itself, its performance, and its competitiveness. By adopting a stakeholder lens to identify the dynamics of the business case, our study emphasizes firm–-stakeholder interaction as a potentially fruitful research opportunity to appreciate CSR-related impacts. In this sense, future studies could complement the search for the business case with an explicit focus on the stakeholder case and, aimed at understanding whether – and to what extent – impacts on a firm’s performance and on society point toward the same direction.

Firms are searching for legitimacy. Due to the financial crisis and the related corporate scandals, society is asking firms to generate more than money for the benefit of limited groups of interest such as top managers and main shareholders. However, several companies “…continue to view value creation narrowly, optimizing short-term financial performance in a bubble while missing the most important customer needs and ignoring the broader influences that determine their long-term success” (Porter and Kramer).

If many firms overlook these crucial opportunities, it is because the business case for CSR is still elusive. The lack of once-and-for-all supportive evidence has often undermined efforts to fully integrate the CSR perspective into managerial decision making. In parallel, this issue also has a great impact on the corporations’ relationships with investors. In fact, if there is no clear linkage between CSR and, for example, net income, earnings per share, and market value, why should CSR be a worthwhile consideration in investment decisions? Financial markets and the “mainstream” investment community do not appropriately value the CSR efforts carried out by innovative firms and this behavior penalizes business and society.

From a strategic standpoint, rejection of CSR dramatically limits companies’ understandings of their surrounding environments. For the investment community, ignoring the possible consequences – if not benefits – of CSR means losing opportunities for more reliable and robust investments. Despite some attempts to integrate these points into mainstream management and performance assessments, financial considerations are still the prevailing criteria for accepting or rejecting corporate initiatives or investments. Therefore, more comprehensive and reliable tools and methodologies, such as integrated reporting, to support the evaluations of corporate performance and business projects are needed.

Our analysis proposes a framework that could help companies and the investment community to better understand how CSR – and therefore more inclusive stakeholder-oriented governance systems – could positively affect corporate performance. Firms can refer to that to better assess, reframe, and improve their CSR policies – in terms of their efficiency and effectiveness – by considering the mechanisms that could lead to enhanced performance. The investment community can draw on this framework to increase its understanding of corporate initiatives and efforts in order to better evaluate the real quality of management and the sustainability of the value-creation processes developed by the companies they work with.
Furthermore, our framework could also assist a more balanced interaction between firms and the investment community. At the moment, this field suffers from a knowledge gap.

To address the sustainability challenge, several firms are developing more participative governance systems and deploying broad value-creation processes by targeting, involving, and engaging stakeholders, but these efforts are not fully appreciated by the financial markets. The perspective provided by the CSP-CFP multilevel framework outlined in this study offers a positive contribution to address this crucial issue and direct the behavioral patterns of firms and investors toward more aware, consistent, and informed approaches.